Budget cuts hijack medical device and patent fees

WASHINGTON – In recent years, people who want patents or who have medical devices they want approved have paid millions of dollars in increased fees that were supposed to be used to streamline the process.

Now, automatic federal budget cuts known as “sequestration” have cut off access to the money, prompting a high-stakes fight that involves some of Minnesota’s biggest companies.

“The new pork on Capitol Hill is the battle over exemption from sequestration,” said Don Kettl, dean of the School of Public Policy at the University of Maryland.

Separate bills in the House propose to protect the device industry and patent applicants from sequestration. The device industry’s bill has 16 co-sponsors (none from Minnesota), while the patent bill has just three.

Late last week, Minnesota Sen. Al Franken and several others, including leaders of the Appropriations Committee, introduced a bill in the Senate to shield the device industry user fees from the automatic budget cuts.

“I’m working to ensure that the FDA has full access to the user fees it receives, and that the approval process for medical devices doesn’t come to a halt because of the sequester’s across-the-board, indiscriminate cuts,” Franken said in a statement.

No Senate bill yet covers patent reform.

All the maneuvering raises questions about the difference between voluntary payments to the government, like the ones the medical device industry pays vs. taxes imposed by law.

Innovation and jobs hang in the balance, those seeking exemptions say, and a lawsuit attacking sequestration remains possible.

Voluntary payments are supposed to be distinct from regular tax payments, said Kevin Rhodes, chief intellectual property counsel at Maplewood-based 3M, one of the country’s larger patent holders.

Yet an estimated $148 million in patent-applicant fees designated for improving the approval process already have disappeared into the caldron of automatic budget cuts.

“I don’t know if there is any mechanism to get those funds back,” Rhodes told the Star Tribune.

On the medical device side, increased user fees legally designated to speed up the Food and Drug Administration (FDA) review of new products reside in a similar limbo. The amount — roughly $3 million a year — is much smaller than what patent reformers have lost, but the principle is the same.

“It’s not taxpayer money; it’s industry money,” said Steve Ubl, president and CEO of the Advanced Medical Technology Association trade group, known as AdvaMed.

How many other payment programs fall into the same category as patents and devices is unclear. Ubl said there are “hundreds of fees” built into the federal budget. The White House Office of Management and Budget (OMB) has taken a broad stand against exempting any of them from sequestration and is unlikely to reconsider, Ubl said.

In response to a Star Tribune interview request, an OMB representative sent an e-mail that quoted the law — “activities financed by voluntary payments to the Government for goods or services to be provided for such payments” are not subject to automatic budget cuts. The statement said money paid to buy government publications fell into that category, but it did not address questions posed by the Star Tribune about patent and device fees.

The American Intellectual Property Law Association argued to OMB that patent applicant fees should be exempt from automatic cuts because the U.S. Patent and Trade Office (USPTO) receives no taxpayer support.

“I believe they’re acting contrary to the statute,” intellectual property association executive director Q. Todd Dickinson, a former director of the USPTO, said in an interview. “I don’t think it would be a bad thing for someone to bring a lawsuit.”

Maryland’s Kettl thinks OMB is acting within its legal purview even if its actions don’t seem to make sense.

“The fact that it’s the private sector giving the money doesn’t protect them from reductions [because of sequestration],” Kettl said. “What look to be good solid deals may not be.

“It’s nuts. It’s insane. But it comes with how the budget process has gone so far.”

Minnesota Sen. Amy Klobuchar favors replacing the sequester with targeted cuts, but Congress has not been able to agree to a plan.

“I strongly believe that medical device and patent user fees as well as funding for critical programs like the [National Institutes of Health] should not be subject to these across-the-board cuts,” Klobuchar said.

In May, the Coalition for 21st Century Patent Reform, which includes 3M, wrote to the chairmen of the Senate and House Judiciary Committees begging for a Congressional reprieve from sequestration.

“The OMB decision to apply the sequester to the [patent office] is not only shortsighted, but creates unacceptable long-term repercussions for the patent system,” the group’s chairman wrote.

The 2011 America Invents Act established a special fund to pay for improvements in an understaffed office with a 30-year-old computer system that had a backlog of 750,000 patent applications each taking, on average, 30 months to process.

With the sequester seizing money that otherwise would have gone to make that system better, “We’re back to where we were before [reform],” 3M’s Rhodes said.

Device makers have used a version of the same argument to make their case for relief: User fees paid by the industry to the FDA should not be treated the same way as taxpayer dollars, Ubl said. Device makers made a deal with Congress and the FDA to help get products to market more quickly by agreeing to increase user fees for that specific purpose.

Not releasing those funds does not help pay down the national deficit, Ubl maintained, it just puts the money “in a black hole.” Sequestering the money also “violates the compact we reached with Congress,” Ubl added.

The question of whether Congress can hold up its end of the bargain remains unanswered.

The intellectual property association’s Dickinson says Congress “absolutely” reneged on its promises to patent reformers. Patent applicants “paid for a service from the government,” he said, “and they expect to get that service in return.”